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Not only can an Operating Agreement save your business time, money, and effort, but it can also solve disagreements quickly while giving your LLC a professional appearance. You’ll breathe easy knowing that the minutiae of your business are taken care of.
Give your company the best chance to succeed by planning for its future. The instructions below will help you set up an Operating Agreement for your Colorado LLC.
A Colorado Operating Agreement determines how a Colorado LLC will make decisions. Whether your company is making a determination about money, responsibilities, or governance, your Operating Agreement should lay out the factors to consider, how to evaluate them, and the procedure for ultimately making the decision.
Your Operating Agreement should drive your LLC to perform in a way that maximizes the benefits to its owners (called “members” in an LLC). Think of your Operating Agreement as a contract. All members of your LLC should agree on it, sign it, and be bound to its terms.
The state of Colorado does not require you to provide an Operating Agreement when you file your Articles of Organization with the Secretary of State. Still, the document is recognized by Colorado law and can be used to solve legal disputes.
You can have a verbal agreement, but it’s wise to get it down in writing and store it in a safe place at your office, where it can be reviewed if needed.
An Operating Agreement benefits an LLC in many ways. The U.S. Small Business Administration (SBA) advocates having one for every LLC.
Operating Agreements can be complicated, so it’s a good idea to use a template and/or consult an attorney to help you put one together. The reasons an Operating Agreement is essential to your LLC include:
Depending on the needs of your specific business, the contents of your Operating Agreement can vary. It’s important to make your Operating Agreement as thorough as possible because the members of your LLC will be legally bound to it.
There are some areas that most Operating Agreements cover:
Include the full name of your business. The name in your Operating Agreement should match the name on your Colorado Articles of Organization because it’s the name that Colorado identifies your business with by law.
Remember not to use any variation of your business name. This includes abbreviations. If the business name in your Operating Agreement differs in any way from the one on your Articles of Organization, the Operating Agreement may not be legally binding.
It’s required that the name of your LLC contains one of the following designators: “Limited Liability Company,” “Ltd. Liability Company,” “Limited Liability Co.,” “Ltd. Liability Co.,” “Limited,” “L.L.C.,” “LLC,” or “Ltd.” Be sure to include this designator in your Operating Agreement, as well.
Include the entire name of each of your LLC’s owners. You’ll have to decide how the ownership of your business will be split among your members. An LLC can break up its ownership percentage in any way that its members agree upon. Some examples are:
In your Colorado Articles of Organization, you’ll have to choose a management structure for your LLC. There are two types of management structures you can choose from:
Outline all the responsibilities of the key people in your LLC. Present a clear picture of the responsibilities of every member and manager in your company. Remember to clarify their rights within the business and what actions they can take for the business.
Include the duties of any members who aren’t directly involved in the day-to-day business. For example, are there certain decisions they must vote on or meetings that they need to participate in?
You’ve already decided how you want to divide the ownership of your company. Now, you’ll have to divide voting power.
One way to do this is to make members’ voting power proportionate to the percentage of the company that they own. If one member owns 40% of the company, and three other members would own 20% each, the member who owns 40% would have double the voting power of each of the other three members.
However, you don’t have to divide voting power by ownership percentages. You can use any metric you like, so long as all members agree to it.
During the life of your LLC, its members might have to make many decisions, like:
Not every member has to vote on every issue. Your Operating Agreement should lay out which members will vote on what decisions.
When your LLC starts returning profits, you’ll need a plan to administer those profits among your members. You have a great deal of freedom with how you distribute profits in an LLC.
Consider how your members will get paid. Will their share of the profits be deposited directly into their bank accounts? How often will they see returns? Remember that in an LLC, each member must declare their share of profits on a personal tax return at the end of the year.
It’s also crucial to decide what percentage of the profits each owner will receive. It may make sense to you to give a larger percentage of profits to members with greater ownership in the company, but you can also divide profits evenly among all members or by some other method.
Colorado does not mandate scheduled meetings for an LLC, but it’s wise to lay out the times for your members to meet. Your plan should include:
By signing the Operating Agreement, each member of your LLC acknowledges that they’ve seen and agreed to the meeting list and will be less likely to miss important engagements.
Hopefully, your LLC has a long and industrious business life. During your company’s existence, it’s possible that you’ll lose some members to other business opportunities, retirement, death, or a variety of other circumstances.
Your Operating Agreement should explain what will happen to a past member’s assets in the business. Your company’s decision on how assets are transferred can have an impact on how your members plan their personal estates.
For example, if a member dies, will they be allowed to leave their stake in the company to a family member, or will their portion be divided among the other members of the LLC?
When a member does leave your LLC, you’ll want to keep your business running smoothly. There should be a clear procedure for what happens to their ownership in the company and the induction of new or replacement members. You’ll have to decide:
Sadly, at some point, you may decide that it’s no longer feasible to keep running your LLC. In that case, the business will have to be dissolved.
Planning for the deconstruction of your company may feel bleak, but it’s necessary to have a plan to handle it.
Your Operating Agreement should include a strategy for when and how to dissolve your LLC. Some things you’ll want to address in your strategy are:
As your company changes over time, you may find that your Operating Agreement needs to be adjusted. Your LLC may grow or shrink. Members may leave or join. You might decide to reevaluate member roles in your LLC.
Whatever change happens in your business, you’ll need a process for changing your Operating Agreement. You’ll need to decide what actions need to be taken to amend your Operating Agreement, how amendments are decided on, and who regulates those amendments.
You may think that an Operating Agreement isn’t necessary if you’re starting a single-member LLC because, as the only member, you’ll be making 100% of the decisions. Here are a few reasons it’s still very important for a single-member LLC to have one:
A severability clause explains that even if some part of an Operating Agreement is void, the rest of the Operating Agreement remains valid. This clause is found in many contracts. By including a severability clause in your Operating Agreement, you’ll protect yourself from making a tiny mistake that renders the entire document invalid.
Because drafting an Operating Agreement can be complicated. It can be a good idea to enlist some professional help. A business lawyer can help you draft the best Operating Agreement for your particular business.
ZenBusiness makes drafting your Operating Agreement easy. Use our customizable template to create an Operating Agreement for your Colorado LLC. Even with a template, though, it’s still a good idea to have a lawyer look at the final product.
You should take time regularly to make sure your Operating Agreement is up to date. LLCs are flexible enterprises. You may find that the way you do business evolves. Some reasons you’d want to update or amend your Colorado Operating Agreement include:
By analyzing your Operating Agreement every year, you can make sure that your Colorado LLC is legally compliant and runs as efficiently as possible.
Read through your Operating Agreement with the other members of your LLC. If you see anything that could be changed, have your members vote on whether to change it. If you decide to make a change, write it down immediately, and then go back and alter your Operating Agreement.
Some changes to your LLC will have to be filed with the Colorado Secretary of State. There is a $25 fee for filing a Certificate of Amendment for your LLC.
An Operating Agreement is not required in Colorado, but it’s a very good idea to have one. An Operating Agreement legally binds members of an LLC to its terms and takes legal precedence over a state’s default laws regarding LLCs.
ZenBusiness offers a customizable template to help you set up your Operating Agreement. You’ll still want to run it by a lawyer when you finish, though.
It’s important for a single-member LLC to have an Operating Agreement, much like it is for a multi-member LLC. The document lays out plans for the growth of the LLC and serves as a legal notification that the sole member has complete freedom to act on behalf of the LLC.
No, Colorado law does not require you to file an Operating Agreement with the Secretary of State. Rather, the Operating Agreement should be stored somewhere at your company, so you can access it when it’s needed.
Legally, you can draft your own Operating Agreement. Templates, like the one offered by ZenBusiness, can make the process easier, but you should always have a lawyer check your document.
While you don’t legally need a lawyer, one familiar with your state’s business laws can really help you make the most of your Operating Agreement. A professional may be able to add parts to your Operating Agreement that can really set your LLC up for success.
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